Crompton Greaves - Management Meet Update - PhillipCapital

We met with the management of Crompton Greaves to understand the current business environment and the outlook for the next few quarters. The key takeaways from our meeting are:

Overseas power segment witness 8% sales growth (ex ZIV); profitability hurt by losses at the Canadian plant. As per management, sales growth for the power subsidiaries was at 8% (+4% on constant currency basis ex ZIV). Due to floods in May, the Hungarian facility lost EUR4mn (Rs0.3bn) in sales. If this had been included, the overseas power sales would have grown by 11% YoY. At the EBIT level, the Canadian facility contributed Rs0.3bn to the EBIT level loss at the overseas subs while another Rs0.03bn was from the systems business in US. Loss at the EBIT level for overseas power segment (ex ZIV contribution of ~Rs0.17bn ) stood at Rs0.38bn. If the Hungarian facility had no delivery delays in Q114, then the power segment would have seen breakeven at the EBIT level. Losses from the Canadian facility are primarily due to operational inefficiencies (assembly layout) and the same is being rectified. However, we could continue to see this facility incur losses for another few quarters (Rs0.9bn PAT loss in FY13). The facilities at Belguim, Hungary and Indonesia have turned positive at the EBIT level. Management has not given any guidance on the EBITDA margin for FY14 for the overseas subs but expects to be profitable at for the full year in the overseas subs. In our view, this would be a herculean task as the overseas subs need to report a 4% EBITDA margin for FY14 to break even (6% for 9M14) which appears highly unlikely with continued losses at the Canadian facility.

Domestic power systems margins may have bottomed out. Despite a sequential drop in sales, margins have grown by 100bps to 8.1% and are set to go higher as sales growth recovers in Q2 on spillover from Q1; note Rs0.7bn of sales were lost due to a fire at the Kanjurmarg facility. Increased exports from the Kanjurmarg facility earn higher margins that the domestic markets.

Domestic consumer segment sees robust growth driven by new store additions and market share gains. The consumer segment saw a robust 21% growth in sales driven by addition to the existing stores, advertising spends and market share gains. Fans (70% of sales) grew by 29% with a 26% volume growth which clearly beat industry growth by a wide margin. Management expects the trend in sales growth to continue for the rest of the year.

Industrial segment growth to be driven by railways and exports; Emotron seeing robust growth. The domestic industrial environment remains very challenging with the key end markets of cement and power remaining very subdued. HT motors continue to see delivery deferrals by the customers. Increasingly, exports to Europe are being made to counter the slow down in the domestic market. Management expects to clock a growth of 6-10% YoY in FY14 on the back of higher exports and sale of traction motors to the railways. Of its current order book, ~50% is composed of railway traction motors which continue to see robust demand. Emotron has seen a ~23% sales growth in Q114.

We retain our estimates for FY114 and FY15 and build in Rs1bn(loss) and Rs0.13bn(profit) at the overseas subs. Our target price of Rs85 is set at 10x FY15e EPS. We retain our Neutral rating as we await further signs of stabilization at the Hungary plant and reversal of losses at the Canadian facility.

Source : Equity Bulls

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